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Schumpeter – How Enel became Europe’s climate centurion | Business


BACK IN THE 1980s a young Francesco Starace was working in the Saudi desert on a wasteful fossil-fuel project. His task was to build an oil-fired power plant. It was highly inefficient. Even though the country sits on a sea of the stuff, the fuel needed to be transported by lorry hundreds of kilometres across the desert from Jeddah. And to begin with there were no customers; its aim was to provide a way to persuade nomadic tribes to settle down in air-conditioned homes. Mr Starace loved the job. Only years later did it strike him how “crazy” it was. He tells the story to illustrate that the significance of sustainability did not dawn on him quickly.

Today the 65-year-old is boss of Rome-based Enel, Europe’s largest utility. Its market value has more than doubled to €85bn ($101bn) since he took over in 2014, making it as big as an oil giant. Concerns about climate change are now all the rage among the world’s business elite. But few companies match Italy’s biggest firm in putting its money where its mouth is. On November 24th Mr Starace unveiled plans to invest €160bn by 2030 to virtually triple its renewable-energy capacity to 120 gigawatts and transform its grids in Europe and Latin America to prepare for an all-electric future. The announcement came weeks after a similarly striking pledge by Iberdrola, Spain’s second-biggest company, to invest €75bn in renewables and grids by 2025. In America NextEra, a pioneering utility which briefly eclipsed ExxonMobil in value of late, has also promised to fork out a fortune on wind and solar.

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The triumvirate’s spending plans are still dwarfed by the vast sums oil companies pour into fossil fuels every year. But they make three things clear. First, renewables have moved from niche to the big time. Second, utilities, formerly the dowdiest part of the energy universe, are now where the action is. Third, the oil industry has a lot to learn if it wants to invade their patch.

Sitting in his book-lined study on the eve of the announcement, the bespectacled Mr Starace does not fit with the caricature of a gruff utility boss. He wears a black crew-neck sweater. He reads poetry. He drives a Tesla. When he set about selling off Enel’s legacy coal-fired power stations in 2015 he wanted them turned into museums and art galleries. He talks about energy with a soft-spoken enthusiasm more usually found among tech evangelists. When discussing the money that America, Britain and the European Union are promising to invest in clean energy over the next few years, he purrs: “They finally got it.”

The pandemic, Mr Starace says, has given the world a glimpse of a renewables future. For years it was a matter of hot debate how much intermittent wind and solar power an electricity system could absorb without crashing. Lockdowns, he thinks, have helped settle the argument. They crushed demand, driving out conventional sources of power generation in favour of cheaper renewables, yet systems withstood the shock “beautifully”. Though gas and coal will bounce back, he believes governments will be reassured that renewables do not pose the dangers that their critics claim. Enel is taking advantage of the political tailwinds. By 2023 it plans to invest €16.8bn in onshore wind and solar, promising to raise core earnings, or EBITDA, by 13%. It still operates coal-fired power plants in Italy but vows to close them down by 2027, three years ahead of schedule. In a dig at the oil industry, it has taken to calling itself a “renewable supermajor”.

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Renewables catch everyone’s attention. But Enel also proposes big investments in networks and distribution—the pylons that make up a grid, as well as the poles and wires feeding electricity to customers—which it operates in eight countries. To reinforce and digitise them for a future of clean energy, electric vehicles and mass electrification, Enel plans €16.2bn of investments in the next three years. It is also open to making acquisitions. Its total spending will be financed by a slight increase in net debt, green bonds and government clean-energy programmes.

The €20bn in annual EBITDA Enel is likely to generate as a result marks a “mind-blowing” turnaround, says Sam Arie of UBS, a bank. When Mr Starace took over, Enel was debt-ridden and had recently cut the dividend. Yet now it promises a guaranteed payout for the next three years, even as many pandemic-hit companies can scarcely look beyond January. Utility analysts, a nerdy bunch, relish the boldness. “You have made our job a lot more interesting,” one from Goldman Sachs, a bank, told Mr Starace.

Oil companies, which once peered down their noses at utilities, now eye them with envy. They have a lot to learn. For all their efforts to repaint themselves green, their ambitions remain a pale shade of it. Enel’s promised renewables investments in the next three years almost match those of BP, Royal Dutch Shell and Total combined. The oil majors also lack the right skills. Mr Starace says vertically integrated utilities such as Enel are different from most oil companies chiefly because of their relationships both with regulators and customers. “The only thing they have in common with us is the word ‘energy’,” he quips. And, as Meike Becker of Bernstein, a broker, puts it, oil giants tend to lack utilities’ financial discipline. They talk a good game. Utilities, in contrast, like to under-promise and over-deliver.

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Dangers lie ahead. Increased competition means Enel is lowering its predicted returns beyond 2023. Its desire to move into India, a minefield of an energy market, may lead it astray. And its zeal to expand could lead to costly bidding wars for networks, such as the one it won in 2018 against Iberdrola in Brazil’s São Paulo state.

Generation change

Mr Starace, recently given a third term as boss, appears as unflappable as ever. He has strong lieutenants who could take over when he retires. He is a model of southern-European business acumen. And he has a smooth Italian charm. “I’d love him to be the grandfather of my kids,” coos one investment adviser. Not many utility bosses can claim that as an endorsement.

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This article appeared in the Business section of the print edition under the headline “The climate centurion”

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